Kroll report falls short of placing blame for financial mess

Audio

Aired 4/19/09

The Kroll report delivered to the city of San Diego yesterday concludes laws were broken when the city failed to disclose its massive pension deficit to investors. But it's still ambiguous as to who is to blame for the resulting fiscal mess. City officials approved the report with relief, after hearing that it satisfies the outside auditor's needs to complete a 2003 audit before too long. That will be an important step toward restoring the city's credit rating. KPBS Reporter Alison St John has more.

The lead Kroll consultant and Former Securities and Exchange Commission chair, Arthur Levitt, delivered the report's conclusion to San Diego city council, and had some damning things to say about the city's financial practices.

LEVITT: "San Diego city officials fell prey to the same kind of corruption of financial management and reporting that has afflicted such municipalities as Orange county and such private sector companies as Enron, Worldcom and Adelphia. The failure was a cultural failure."

Levitt spoke of a culture based on lack of transparency, obfuscation and denial of financial reality. He said even the warnings of the city's independent watchdogs were gradually eroded. If outside lawyers didn't agree, they were replaced, or their objections were gradually worn down and turned into consent. Levitt blames this all-pervasive culture of expediency, rather than the individuals within it.

LEVITT: "While this conduct was plainly unlawful, we find the evidence does not demonstrate that city officials set out with the objective of defying legal mandates."

The report concludes that when the city council failed to disclose the massive pension deficit to bond holders, they were guilty of no more than negligence. Negligence is the least serious offence under Securities and Exchange Commission guidelines.

City Attorney Mike Aguirre was skeptical of the report's conclusions.

AGUIRRE: "There were laws violated, but it doesn't make any difference, they were just negligent."

Aguirre grilled the consultants' attorneys over how they reached the conclusion of negligence in the face of all the evidence that city officials knew what they were doing.

Attorney Michael Young, who works with Kroll, said the financial auditors are more concerned about intentional fraud.

YOUNG: "And the reason that the auditor is less interested in negligence is that people make mistakes all the time and that doesn't mean you have to be fired , doesn't mean you have to resign."

The consultants did their best to shift the focus away from the past and into the future what the city will have to do to restore the confidence of investor. Lynne Turner said the city must learn from its past mistakes, and he said Kroll does have some concerns about whether the city is committed to making real change.

TURNER: "We believe that sooner or later you're going to have to go back to the citizens and talk to them about what they need to pay for and the terms and the commitments that the city council and other have made."

This comment led to the question of whether the consultants were recommending higher taxes. But they said higher taxes are not mentioned anywhere in the report. Mayor Sanders did not waver on the issue.

SANDERS: "Let me be very clear this does not change my views on taxation, we have to draw back in that'll done through cuts not taxes, that's a discussion for another time."

The immediate impact of the report is its effect on the city's languishing 2003 audit. KPMG, the city's outside auditors, finally agreed to sign off on the financial statement soon, now that the Kroll report is complete.

Mayor Sanders was upbeat, saying he sees the report as a significant milestone on the city's long road back to the bond market.

SANDERS: "We saw today not everybody agrees with the conclusions and I also realize some people would use the report to blame all of that is less important that now we have this report we'll be able to move this city forward. The release of this report will hopefully put a very unfortunate chapter of this city's history behind us."

Moving forward will involve taking steps to make sure the city has learned its lesson. The report contains numerous recommendations that city officials will talk about over the next month. The mayor and council will meet to decide how to act on those recommendations on September 19. Alison St John, KPBS News.